My wife and I already decided that we don’t plan to pay 100% of their tuition, but we will try to help them out so long as they are working towards getting a degree.

A recent study by Fidelity reveals that others have similar aspirations, in that parents plan to pay 62% of their child’s college costs, but they’re only on track to pay 1/3 of that cost.

Knowing that college isn’t getting any cheaper, we started saving for our first son basically immediately after he was born, and we’ve followed suit with each son thereafter.

It’s always nice to have choices like saving for your kids college, but many parents get confused on what’s best for them.

Having a plethora of choices can be overwhelming.

Most parents have too much other issues to deal with that trying to decide to the best college savings plan is shoved further down the priority list.

Don’t worry, busy parents….this post (and video) is for you! 🙂

For somebody who feels overwhelmed, here’s a quick look at the four ways to save money to pay your kids tuition checks.

1. 529 college savings plan

The 529 College Savings Plan is one of the more popular ways to save for college. Fidelity reported that 33% of Americans are currently using the 529 plan an increase of 18% from five years ago. For me, it’s the way that I save for all my sons’ college.

If you happen to be a resident of my state, you can read a post I wrote on the Illinois 529 College Savings Plan Options. (Yes, the “S” is silent). If not, double check your own state to see what the options are.

You can contribute up to $14,000 ($28,000 for married couples) annually without gift-tax consequences. Under a special election, you can invest up to $70,000 ($140,000 for married couples) at one time by accelerating five years’ worth of investments.

You can contribute until your account value reaches $350,000. (I don’t think I’ll have a problem with this).

Earnings can grow tax-free (Just like the Roth IRA).

Withdrawals for qualified higher education expenses are free from federal tax. Withdrawals for non-qualified expenses are subject to ordinary federal income tax, plus a 10% penalty on the earnings.

There are no income limits. You can contribute no matter how much you earn.

You maintain control of the assets.

What we love about the 529 plan is that any relative can contribute to the plan. Instead of having them get our sons more toys that they don’t need, we’ll ask them to contribute to their 529 plan. That’s definitely the gift that keeps on getting.

2. UGMA/UTMA Custodial Accounts

UGMA/UTMA custodial accounts let you take advantage of your child’s lower tax rate while saving for your child’s education. Personally, I’m not the biggest fan of these because of the control issue. I know how I was at 18, and I don’t expect my kids to be any more mature than I was with being able to manage a large sum money. I’ll be happy if they prove me wrong.

There are no contribution limits.

Beware of the Kiddie Tax. For children under age 19, and full-time students under age 24 whose earned income is less than one-half of their support, the first $950 of earnings is tax-free. Earnings between $1,000 and $2,000 are taxed at the child’s rate; earnings above $2,000 are taxed at the parents’ rate.

There are no income limits. You can contribute no matter how much you earn.

The beneficiary gains control of the assets at age of majority, which is age 18 or 21 in most states.

Where I have used a custodial account is to buy my kids stock. I bought one share of Nike and Under Armour for my first son so he would have a stock to track when he gets older. I plan to follow suit with both my other boys.

3. Your Own Investment Account

Saving for your child’s education through your own investment account allows you maximum control of the assets. This would be setting a joint account (or individual) with a brokerage firm and investing in mutual funds or individual stocks.

While you definitely have more control of the money, you’ll be hit with taxes each year.

There are no contribution limits.

Earnings are taxed to the owner.

There are no income limits. You can contribute no matter how much you earn.

You maintain control of the assets and decide when withdrawals will be made.

4. Your Roth IRA

I know what you’re thinking: “A Roth IRA is for retirement, not college savings.” Yes, that’s true. I’ve encountered a few times where people are extremely enthusiastic about saving for the kids’ college, and in doing so, put their own retirement on the back burner.

By utilizing the Roth IRA, you ensure that you are saving for retirement, and if your kid does goes to school, you can pull out your contributions with no problem and just pay the tax on any gains.

You are in control of the assets and decide when to withdraw the money.

I am a BIG believer in the Roth IRA since there is no additional taxes on the money once you retire. If you haven’t opened a Roth before, go over to my article on the Best Places to Open a Roth IRA to get in depth descriptions of all your best options.

Do you have a seperate account set up for all 3?
I set 1 up for my daughter when she was born, but haven’t done a seperate one for my son. I’ve been justifying it by knowing I can use it for either. Just wondering what others are doing?

Another thing to consider for 529 versus UGMA is that the UGMA is considered to be the “student’s.” Often for college financial aid (at least when I attended < 5 years ago), student assets were considered more "fair game" than parent assets, so having money in a 529 would increase the student's perceived need over UGMA (which meant more financial assistance from the school).

I don’t have kids yet so I’m not overly concerned about which savings vehicle to use just yet, but I am increasingly skeptical of the value of the four year degree. I wonder if 529’s can be used for other schooling/training alternatives.

@SimpleRyan Great question! Remember, the money you put in is after-tax so you have access to that at any time. It’s the interest and earnings that must stay there until your kid goes to college and you need to cash it out.

If your kid decides to not go to college you can always transfer it to another child. If that’s not an option, it would be similar to cashing out a retirement account in that you would pay tax and penalty on any of the gains you have.

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